Recent reports highlight leading banks’ desire for an Asset Reconstruction Company (ARC) to focus on the farming sector’s debt recovery. Banks favour this approach due to the success of previous government-backed ARCs dealing with the industry’s NPAs. Suggestions from the Indian Banks’ Association include adapting legislation regarding agricultural land, similar to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.
About ARC: Purpose and Legal Basis
ARCs are specialized financial institutions that buy Non Performing Assets (NPAs) from banks and financial institutions, enabling them to clear their balance sheets. This frees banks to concentrate on traditional banking activities without expending resources on bad asset recovery. The SARFAESI Act, 2002 provides a legal framework for the establishment of ARCs in India and allows for the reconstruction of bad assets without court intervention. Since the Act’s inception, numerous ARCs have been formed under the regulation of the Reserve Bank of India (RBI).
ARC Funding and National Asset Reconstruction Company Limited
ARCs can raise funds through bonds, debentures, and security receipts. Recently, the Budget 2021-22 proposed setting up an ARC funded by state-owned and private sector banks, with no equity contribution from the government. This ARC will also have an Asset Management Company (AMC) to manage and dispose of bad assets in approximately 70 significant accounts, representing Rs. 2-2.5 lakh crore of unresolved stressed assets.
Farm Loan NPA and the Need for an ARC
The latest Financial Stability Report reveals a gross NPA ratio for the agriculture sector at 9.8%, compared to 11.3% for industry and 7.5% for services. Despite decreasing indebtedness among agricultural households, the average debt has risen by over 57% since 2013. Institutional sources such as banks, cooperative societies, and government agencies account for nearly 70% of these outstanding loans. Concerns are growing that NPAs in the farm sector may rise ahead of Assembly elections in seven states amid anticipations of potential loan waivers, leading to recovery difficulties for banks.
Challenges Associated with ARCs
Meeting the NPA market’s substantial financial demands is the primary challenge faced by ARCs. Limited availability of professionals with turnaround expertise can hinder ARC operations, as can regulatory issues affecting compensation. Additionally, ARCs face the challenge of pricing mismatches with selling banks owing to the absence of a vibrant distressed debt market. Regulatory constraints imposed by the RBI have also restricted their growth potential.
Current Measures to Handle Farm Sector NPAs
Currently, there is no unified mechanism or law to address NPAs in the agriculture sector. Agriculture is a state subject, resulting in a varied enforcement of mortgage laws on agricultural land. This inconsistency and the absence of certain necessary recovery laws can make recovering loans a complex and time-consuming process.
Need for a Realistic Approach and Role of ARC
A realistic pricing approach between banks and ARCs is essential, with all stakeholders, including regulators, working together to fast-track the sale, resolution, recovery, and revival of NPAs. Banks’ recovery efforts in the agriculture sector are often hampered by the anticipation of farm loan waivers. Expanding and strengthening the role of ARCs could help solve the massive NPA problem currently affecting the Indian banking industry. However, it’s not a standalone solution – customized solutions addressing different aspects of India’s bad loan problem should be designed with ARC serving as the last resort after the failure of other methods.
